Small Cap Value Report (1 Oct) - BEG, RNWH, PUR, WGB, FDL

Stockopedia

Oct. 1, 2013, 2:00 AM

Good morning! The UK market is set to open flat today. Begbies Traynor (LON:BEG) are the only UK Listed insolvency practitioners, and business has been slow for several years now - mainly due to Government policy leaning on the Banks to allow zombie companies to continue trading. This has meant that, despite some pretty grim economic conditions since 2008 (now improving), corporate insolvencies have actually been low. Hence Begbies have done several rounds of cost cutting (i.e. reducing staff amp; closing surplus offices).

I recently bought back into Begbies (in a small way), on the basis that historically insolvencies rise strongly in a recovering economy - partly because there are more buyers for assets, so disposals can occur at a reasonable price, but also because many companies which manage to survive a Recession then fail as their working capital is inadequate to finance expansion.

The main attraction of Begbies shares is the generous dividend yield, although it has looked a bit touch amp; go whether the payout would continue. At the last set of results, the 2.2p total dividend was maintained, so at 39p per share that is currently yielding a generous 5.6%.

Anyway, the reason I mention it is that Begbies has issued a trading update today, in advance of its AGM. This update covers the period from 1 May 2013 to 31 August 2013, and is negative - they say that revenue is down year-on-year, due to "subdued" market conditions, and downward pressure on fee rates. That has been "partially mitigated" by the cost reductions announced previously, in July 2013.

Net debt is "broadly in line with our expectations", and there is nothing upbeat in the outlook statement either, which says that market conditions "show no sign of improving". So I would imagine this is likely to hit the share price by probably around 10% today perhaps, at a guess?

Although as you can see from the Stockopedia graphic on the right, broker forecasts have already been heavily revised down this year, so I would expect the market to only react in a limited way to today's news, which is really just saying more of the same, rather than anything disastrous.

There is brief trading update today from Renew Holdings (LON:RNWH), which describes itself as an "engineering group supporting UK infrastructure". Trading in H2 has been "pleasing", and they expect that results will be in line with market expectations for the year ended 30 Sep 2013.

Stockopedia is showing broker consensus of 13.7p EPS, so that puts the shares on a reasonable PER of 10.4. There's possibly a bit of upside on that rating, but not much, as this type of company doesn't usually command a high rating. Although this company does seem to be on a roll, having put out good news several times now, see the archive of my comments here for more detail.

They also mention that at the year end date the group will record a net cash position - clearly a positive move, this follows some property disposals a little while ago, if my memory serves me correctly?

Renew shares have had a very good run recently, but with a solid outlook, and a recovering economy, could possibly have a bit further to run, who knows?

A friend suggested Pure Wafer (LON:PUR) to me earlier this year, when they were 5p a share, and I came really close to buying some. Pity I didn't, as they have since doubled in price. Their final results for the year ended 30 Jun 2013 are published today, following a positive trading update last week.

At the current share price of 9.75p, and with 268.1m shares in issue, that gives a market cap of £26.1m. The company's activities are mainly a reclaim service for silicon wafers, which are sent to it by chip manufacturers, and processed by Pure Wafer into a useable form. They have also dabbled in the solar panel space, but that looks to be less important.

The company has had a difficult history, investing heavily in capex, only to see the price of its services drop, and the operation becoming seemingly uneconomic, at least not covering its own depreciation charges anyway. Things have improved, and it has reported a big increase in operating profit, up from $461k to $3.1m (note that they report in US dollars). I see that the main driver for that increase in profit is a sharply reduced depreciation charge (mentioned in note 10 to today's figures, and due to extending the estimated life of the fixed assets), so EBITDA actually only rose slightly from $6.0m to $6.3m.

Pure Wafer has also fixed its Balance Sheet, with a fundraising, such that it only now has net debt of $1.6m, which is fine given the level of EBITDA meaning there should not be any issues repaying this debt in due course.

The outlook statement sounds encouraging, saying (my bolding);

"The outlook for the global semiconductor manufacturing industry remains very positive, with demand continuing to increase. Against this market backdrop, the Board is confident that the Group will make further substantial progress in the current year as demand for our wafer reclaim services increases commensurately."

I see that WH Ireland has increased their price target from 11p to 11.5p this morning, based on 12.4 times current year PER, which looks about right to me. I see the price has slipped to 8.62p, so looks like some profit-taking going on there.

Given that this is a capital-intensive business, and that the return has been poor from previous capex, one does wonder about their strategy of using cashflows to invest in more capex. If I were a shareholder, I'd be banging the table for a dividend.

Interim results from Walker Greenbank (LON:WGB) have been issued this morning, for the six months to 31 Jul 2013. This is the luxury interior furnishings group, whose brands include Sanderson, Morris amp; Co., and others. This was a favourite of mine last year, when the shares were woefully underpriced, and I bought at something like 55p from memory, and thought I'd done very well by selling out somewhere around 90p (again, just from memory). The shares since carried on up, and recently hit 160p! However, it looks as if they ran ahead of themselves, since the shares have slipped to 146p today, so let's have a look at the figures and the valuation.

Turnover for H1 rose 2% to £39m, and profit before tax was up slightly to £2.0m. Bearing in mind that the market cap is about £87m here, those figures don't look impressive to me. Basic EPS is 2.71p (up from 2.47p), and allowing for the H2 weighting to their trading year, that probably means the full year is likely to drop out about 7.5p. So a PER of 19.5 - yikes, that is pricey!

This is where we get into the murkey world of adjusted figures. The broker consensus is for 9.59p EPS this year (ending 31 Jan 2014), so they are obviously basing that on the company's adjusted figures. However, I'm not sure I accept the adjusted figures. The two items which are adjusted for are the accounting charge for share options (LTIP) and the defined benefit pension charge. Well in my book both of those are ultimately costs paid for by shareholders one way or another, so I'd be inclined to leave those costs alone, and not adjust them out.

Even if you accept the company's adjustments to EPS, then the PER is still a pretty hefty 15.2.

The outlook statement is positive, but unexciting;

Total brand sales in the 8 weeks since the half year are up 3.8% compared with the corresponding period last year. It is encouraging to note that brand sales in the UK are up 2.6% in September on an improving trend, giving us confidence as we enter the key autumn selling period. Manufacturing continues to perform strongly and our licence income continues to build. We remain confident of meeting market expectations for the full year.

So overall, I think the share price here has run well ahead of reality, and to my mind a fair price would be in the 100-110p range perhaps? The Balance Sheet is OK, with modest net debt, and the dividend yield is weak, at forecast 1.1%. There's really not anything to get excited about here in my opinion. The shares have justifiably re-rated for an economic recovery, but have probably now overshot on the upside, in my opinion.

Findel (LON:FDL) has issued what seems a positive trading statement, so I'm surprised their shares have fallen 5% to 235p. That said, I think this is a horrible business model - it's a ragbag of mail order (and internet) businesses, which give extended credit to customers, so there are huge debtors, and correspondingly huge bank debt. So you never know when the next wave of bad debts is going to hit it - certainly they have been accident-prone historically.

Investors have lapped up Findel's stated aim of raising their operating profit margin to 7-9% for 2014/15. That's all very well, but of course operating profit is stated before interest costs. With a very large pile of bank debt, and higher interest rates inevitably on the way at some point, then investors need to look carefully at what profit before taxation will be, not just look at operating profit, as the interest bill is significant here amp; likely to grow.

It's just a ghastly business model - the shares will always be at the mercy of the bank manager having a bad day, and once you strip out the intangibles, there's nothing left on the Balance Sheet - net tangible assets are slightly negative, at £421k. So the whole business rests on the Bank being prepared to continue extending an enormous loan facility. That's way too high risk for me. There hasn't been a divi since 2009 either.

That's it for today. I had a quick look at the accounts for ST Ives (LON:SIV), which seem to have positive headline figures, but in the end decided it looks a bit messy - with a pension fund, a lot of underlying amp; exceptional splitting of costs going on, so it's difficult to untangle how the business is really performing. It doesn't jump out at me as strong value anyway, and like most things has already had a re-rating, so it's very difficult to buy into things at this stage of the game. I'd rather ferret out overlooked amp; unfashionable stocks that haven't risen yet, or companies that are likely to strongly beat broker forecasts. There are always bargains to be had somewhere, but they're getting increasingly hard to find at the moment.

It will be interesting to see how the latest threat of the US Govt shutting down will affect markets, as well as continued rumblings from the Eurozone crisis that flares up again every now amp; again. All the more reason to be a bit careful in my view.